In order to maximise your potential returns and limit the damage of market shocks, I believe investors should ensure that their portfolio is diversified.
A good example of why this is important is the travel sector. If the COVID-19 pandemic had never occurred, I suspect Flight Centre Travel Group Ltd (ASX: FLT) and Webjet Limited (ASX: WEB) shares would have generated strong returns for investors in 2020.
However, with the pandemic coming out of nowhere and bringing global travel markets to their knees, both Flight Centre and Webjet shares are down materially this year.
This means that if your portfolio had a high weighting to the travel sector, it would have been impacted significantly more than a balanced portfolio.
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How can you diversify?
There are a number of ways to diversify your portfolio. The first is to maintain a decent sized portfolio with exposure to different industries and sectors.
A conglomerate such as Wesfarmers Ltd (ASX: WES) could be a good option as it gives investors exposure to a number of industries through the one company.
But perhaps an easier way to achieve this is through exchange traded funds (ETFs). These funds give investors the option of investing in whole indices, countries, sectors, or even themes through a single investment.
But which ETFs should you buy? Listed below are two that I think would be great for diversification:
BetaShares NASDAQ 100 ETF (ASX: NDQ)
If you don't have meaningful exposure to the tech sector, then the BetaShares NASDAQ 100 ETF could be a great option. It gives investors access to 100 of the largest non-financial companies on the famous Nasdaq index. This includes some of the biggest tech companies in the world such as Amazon, Apple, Facebook, and Google.
Vanguard MSCI Index International Shares ETF (ASX: VGS)
Another great option to consider buying is the Vanguard MSCI Index International Shares ETF. This ETF is arguably as diverse as it gets. It provides investors with exposure to some of the world's largest companies listed in major developed countries. Among its largest holdings are the likes of Amazon, Apple, Microsoft, Nestle, and Visa.
